Digix - The Importance of a Stablecoin

In
the wild world of cryptocurrencies, extreme volatility shocks no one.
This week right after BTC reached a historic high of over $5000 on Sep
02, a downward swing sets the price back by $600, echoing a steep price
dip across 10 cryptocurrencies including ethereum (down by 14.53%) and
litecoin (down by 15.37%).

BTC price movement in a single day. Source: CoinDesk

Whether the 13 billion bloodshed across crypto market is due to investors’ concern over BTC roadmap following the Chinese ICO ban
or a speculator move for manipulate market expectations, we know one
thing for sure: the cryptocurrency market is very far from stable.

Although
there are many benefits of cryptocurrencies — low transition cost,
expansive cross-border reach, autonomy provided by little governance, to
name a few — their lack of stability is a serious hurdle to act as a
strong contender for central bank money.

Is
it possible to build a stable crypto economy? Can we build a stable
coin that could weather the storm of wild crypto market speculations?

What is a stablecoin?

The people behind Dai Stablecoin once stated in this wiki page that stable coin is a “cryptocurrency with price stability” for short and mid term use as “unit of account”. Over the long run stable coin should be able to serve as “store of value” during market down turn, much like how traditional “safe haven” assets would perform.

While
this wiki definition is slightly out of date now, the general
principles defined here still hold true. The main attribute of
stablecoin is its price stability over mid or even long term despite
market turbulence. This would require stable coin to have value
independent from the trading markets.

Gold,
for example, is a classic safe haven asset whose price performance is
somewhat independent from stock or equities market, and its price cannot
be manipulated by central bank controlled interest rate.

US dollar
has been considered a safe haven asset, but as a currency it’s subject
asset bubbles and inflation created by the central bank, such as when
Feb decided to add $4 trillion supply for “quantitative easing”.

Gold and US dollars are traditionally perceived as stable assets. Image source

Currently stablecoins in the crypto world are backed some form of collateral to achieve stability in value. There are USD-backed stablecoin such as Tether, gold-backed stablecoin such as DGX, and ETH-backed stablecoin such as Dai. Other experimental thoughts on stabilising cryptocurrency include Seigniorage Shares where the supply of coins will decrease over time instead of increases.

To
build a stable decentralised economy, we need stablecoins that behave
more like Gold in that it does not need any government to establish its
value. The problem with USD-backed or any FIAT money backed
cryptocurrency is that it’s still doesn’t have any physical reserve
behind it therefore has only “face value” that is subject to inflation
and financial crisis.

Stablecoin Beyond Means of Payment

There
are many use cases for stablecoins with intrinsic value. In the payment
landscape, a stablecoin like DGX can be integrated for credit card
payments.

Tenx / Digix Gold Debit Card

DigixGlobal partnered with TenX to roll out the first ever gold-backed debit card. Image source

What’s really exciting about stablecoin is their ability to act as collateral for term loans,
which requires assets relatively stable in value for the loan to be
secure. DGX, for example, has stable value pegged to LBMA gold price,
and can be safely priced over 6 months period or longer.

Looking into the future when stablecoins are more widely accepted and used, they can be used as a reserve asset
on cryptocurrency exchanges. Many of the biggest bitcoin exchanges such
as Coinbase are by nature centralized. They can be vulnerable to
attacks, and are known to freeze user accounts or cancel transactions due to “security concern”.

With stablecoin such as DGX, it will enable peer-to-peer swaps and therefore create a truly decentralized economy.